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Patent Licensee in Good Standing Can Challenge Patent under Declaratory Judgment Act

January 10, 2007

Patent Licensee in Good Standing Can Challenge Patent under Declaratory Judgment Act

January 10, 2007

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MedImmune Inc. v. Genentech, Inc., et al., No. 05-608

On January 9, 2007, the Supreme Court reversed the Federal Circuit's dismissal of MedImmune's patent invalidity suit under the Declaratory Judgment Act, and remanded for further proceedings. In an opinion delivered by Justice Scalia, the Supreme Court held the Federal Circuit erred in affirming the dismissal of the case for lack of subject-matter jurisdiction and held a licensee is not required to break or terminate a license agreement before seeking a declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed.

In 1997, MedImmune entered into a patent license agreement with Genentech covering an existing patent relating to the production of "chimeric antibodies" and a then-pending patent application. In 2001, the pending application matured into U.S. Patent No. 6,331,415 (the "Cabilly II patent"). Soon after, Genentech advised MedImmune of its belief that the MedImmune product Synagis® was covered by the Cabilly II patent and, therefore, subject to royalties under the license agreement. MedImmune considered the Cabilly II patent invalid and unenforceable and the claims not infringed by Synagis. Nonetheless, MedImmune paid royalties "under protest and with reservation of all of [its] rights," since it was unwilling to risk the possibility it could be ordered to pay treble damages and attorney fees and enjoined from selling Synagis if Genentech prevailed in a patent infringement action. MedImmune subsequently filed a declaration judgment action.

As reported in the January 2006 Federal Circuit Alert, the Federal Circuit affirmed the holding of the District Court for the Central District of California that MedImmune, as a licensee in good standing and not in reasonable apprehension of suit, could not bring an action under 28 U.S.C. §2201 seeking to challenge the licensed patent, as there was no "case of actual controversy" as required by the statute, and thus the Court lacked subject-matter jurisdiction to hear the case.

Setting the framework for the case before it, the Court noted its previous decision Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U. S. 270, 273 (1941), in which it summarized the inquiry for determining if the case-or-controversy requirements under Article III and the Declaratory Judgment Act are satisfied as follows: "Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." In light of this standard, the Court identified the issue to be decided as whether MedImmune's continual payment of royalties — which eliminated the imminent threat of harm — caused the dispute to no longer be a case or controversy within the meaning of Article III.

To decide the issue, the Court looked to Altvater v. Freeman, 319 U. S. 359 (1943), in which the Court held that a licensee's failure to cease its payment of royalties did not render non-justiciable a dispute over the validity of the patent. In that case, the Court concluded that "the requirements of [a] case or controversy are met where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim." In both Altvater and this case, the threat of having to pay actual and treble damages to the patentee in an infringement suit was deemed to be sufficiently coercive to meet the case or controversy requirements.

The Court further stated that the common-law rule that a party to a contract cannot simultaneously challenge its validity and continue to reap its benefits was inapplicable in this case since MedImmune was not repudiating the contract, but rather was asserting that the contract as "properly interpreted" does not prevent MedImmune from challenging the patents.

In light of this decision, licensors and prospective licensees should consider during negotiations whether the license should include specific language restricting the ability of the prospective licensee to challenge the patent while still in good standing. Whether such provisions would be enforceable remains to be seen, but the Supreme Court has now held that if the license agreement is silent on the subject, a licensee will be able to challenge the patent in federal court without breaching the license agreement.

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